Competition Shortcomings in Retain Financial Markets
The Competition and Markets Authority (CMA) has published in August 2016 the final report of its retail banking market investigation, which sets out its analysis of the shortcomings of competition in the markets for current accounts for personal customers and for banking services to small businesses. A short overview of the CMA’s findings and proposals has been published including a list of the main remedies with their approximate commencement dates.
The CMA concludes that older and larger banks, which still account for the large majority of the retail banking market, do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers. The CMA says that these failings are having a pronounced effect on certain groups of customers, particularly overdraft users and smaller businesses. They also mean that the sector is still not as innovative or competitive as it needs to be. The CMA’s integrated package of remedies consists of four elements, firstly three cross-cutting foundation measures, which can be summarised as follows:
- Open Banking Standard: the CMA is requiring the largest retail banks in both the UK and Northern Ireland to develop and adopt an application programming interface (API) banking standard so as to share information to a specified timetable and requiring it to be an open standard so as to enable it to be widely accessible. The CMA requires the banks to release the least sensitive information, for example about prices, terms and conditions and branch location, by the end of March 2017. It expects that all aspects of an open banking standard for sharing transaction data would be up and running by early 2018 at the latest;
- Service quality information: the CMA is requiring banks to display prominently a number of core indicators of service quality. Data will be collected twice a year on a standardised basis, so that customers can easily compare across banks. The CMA says that the Financial Conduct Authority (FCA) is best placed to work with banks to develop and test which specific additional measures of service quality would be most useful, and then to put these measures in place, and it is making a recommendation to that effect;
- Customer prompts: the CMA is requiring banks to send out suitable periodic and event-based prompts such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not. The CMA recommends that the FCA should undertake a programme of randomised controlled trials (RCTs) to identify which prompts are likely to be most effective in changing customer behaviour. The CMA will also be requiring business current account (BCA) providers to send prompts to those SMEs not covered by the FCA’s powers.
The other elements of proposed remedies include:
- Additional measures to make current account switching work better, including building on and improving the existing current account switching service and requiring that customers of all current account providers are able to get a copy of their transaction history after account closure;
- A set of measures aimed at personal current account overdraft users. These will include requiring banks to alert their customers, for example by sending a text message, when they are going into unarranged overdraft and informing customers of a grace period during which they have an opportunity to avoid charges;
- A set of measures targeted at the specific problems in SME banking, making it easier for SMEs to compare different providers and reducing the hold that incumbent banks have in the market for business current account BCAs and SME loans.
The CMA has since published a timetable for implementation of the remedies. This gives the statutory deadline for implementing remedial action as 8 February 2017. The CMA intends to publish informal consultations on draft undertakings and orders between now and November 2016. The draft order/undertakings will be published for formal consultation in November/December 2016.